Why China's US$1 trillion merger makeover could fail

SHANGHAI/HONG KONG (Sept 8): To grasp the scale of the challenges facing Chinese leaders in revamping their sprawling and inefficient state-owned enterprises, consider this: The combined revenue of 100-plus government-owned firms, spanning from train makers to banks and power companies, rivals Japan’s entire US$4.1 trillion ($5.52 trillion) economy. 

China’s SOE sector, traditionally a source of political patronage and economic power for the Communist Party, accounts for about 40% of China’s industrial assets and 18% of total employment, according to Bloomberg Intelligence economists Fielding Chen and Tom Orlik. These government creations are also dragging down growth, with their return on assets in 2015 estimated to be at 2.8%, versus 10.6% for private sector-firms.

Cutting SOEs down to size and improving their profitability is critical to President Xi Jinping and Premier Li Keqiang’s signature economic policy of rebalancing the US$10 trillion economy away from an over-reliance on debt-fueled infrastructure investment and exports to one powered more by services and consumer spending. One strategy has been to embrace mergers -- about US$1 trillion of asset combinations have been announced since late 2014.

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